Additional Materials:

Contact:

Pursuant to a legislative requirement, GAO reviewed the results of the Department of Defense's (DOD) demonstration program evaluating the feasibility of using private contractors to identify overpayments made to vendors, focusing on: (1) assessing the success of the methods used to identify overpayments; (2) determining the types of overpayments identified and the amounts recovered; and (3) identifying factors limiting the identification or recovery of overpayments and developing recommendations for improving the process.

GAO noted that: (1) the methods used by the Profit Recovery Group International (PRGI) to perform recovery auditing resulted in the identification of $19.1 million in overpayments, as of August 14, 1998, and efforts to identify additional amounts continue; (2) however, recoveries of overpayments amounted to only $1.9 million, in large part, because vendors took issue with some of the overpayments identified by PRGI; (3) this caused the recovery process to virtually stop for 8 months while the Defense Supply Center, Philadelphia reviewed the merits of the vendors' issues; (4) the Defense Supply Center, Philadelphia has concluded that the claims of overpayment are valid, but it has not yet notified vendors of the final decision regarding their indebtedness; (5) of $19.1 million in overpayments, $12.4 million was related to cash discounts not taken or received or deducted at the wrong rate, $2.2 million related to most favored customer terms not received, $1.3 million related to duplicate payments made, and $1.2 million related to credits for returned merchandise not taken; (6) as of August 14, 1998, according to PRGI, it had audited about 80 percent of the $7.2 billion audit base; (7) the fact that the overpayments were made 4 to 6 years before audit recovery began also made overpayment identification or recovery challenging; (8) documentation was difficult to retrieve for both PRGI and vendors, and sometimes it was not available; (9) PRGI also had considerable difficulty identifying duplicate payments because the needed information was not retained in the Defense Finance and Accounting Service payment files; (10) according to PRGI, even though its contract was awarded in September 1996, it was slow to begin audit work because of delays in obtaining Defense Finance and Accounting Service computerized payment files and the time PRGI needed to understand DOD's procurement and payment processes; (11) PRGI has made recommendations to the Defense Finance and Accounting Service and the Defense Supply Center, Philadelphia to reduce future overpayments, but none have been implemented; (12) PRGI identified about $1.8 million in overpayments that were outside the scope of its contract, either because they were not within the fiscal year 1993-95 contractual review period or because they involved other government agencies; and (13) neither the Defense Finance and Accounting Service or the Defense Supply Center, Philadelphia chose to pursue payment recovery or inform the other government agencies of the overpayments so that they could pursue recovery and take steps to avoid future overpayments.

Recommendations for Executive Action

Status: Closed - Implemented

Comments: The authorizing legislation initially limited the contracts to be reviewed to fiscal years 1993-1995. Now it covers all fiscal years after fiscal year 1993, and the focus of the demonstration program will be on more recent fiscal years.

Recommendation: The Secretary of Defense should direct the Comptroller to focus future audit recovery efforts on the most recent purchases to maximize the likelihood that government and vendor documentation is available to support overpayment identification and recovery.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: Many of PRGI's recommendations require major reprogramming to legacy computer systems and are not cost-effective at this time. However, appropriate changes have been incorporated into the new Defense Procurement Payment System.

Recommendation: The Secretary of Defense should direct the Comptroller to critically review PRGI's recommendations and implement those that are cost-effective.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: The position of the Defense Finance and Accounting Service is that it uses contractor support for post-audit due to lack of internal resources to perform the audits in-house. Thus, after considering the matter, further action is not intended. However, the Defense Finance and Accounting Service intends to take actions based on "lessons learned" from the contractor's findings to prevent overpayments in the future.

Recommendation: The Secretary of Defense should direct the Comptroller to consider the extent to which it may be cost-effective to undertake moderate internal efforts to identify overpayments before turning audit recovery efforts over to an external group. One technique that DOD might find cost-effective is to periodically request status of accounts from its vendors.

Agency Affected: Department of Defense

Status: Closed - Implemented

Comments: Procedures for notifying other agencies of identified over payments were issued on June 1, 1999.

Recommendation: The Secretary of Defense should direct the Comptroller to establish a process for dealing with overpayments due other agencies.